Issuers aren’t the only ones feeling the heat over executive pay. Investors have been coming under greater levels of pressure in their oversight roles when it comes to remuneration proposals, leading several to take a more public stance as to what they expect from companies, and how these expectations will inform their voting policies.

Interest in voting was boosted by the establishment of the Investment Association’s public register, displaying all the proposals with opposition in excess of 20% in a sortable table. And, with two-thirds of the FTSE 350 having gotten approval for their triennial remuneration policies last year, focus shifted from assessing the suitability of structural elements of proposed policies towards remuneration committee decision-making and implementation. Flowing from this, quantifying responsiveness to shareholder dissent and examining the remedial steps, if any, taken by issuers became a recurring theme in the 2018 AGM season.

PERSIMMON

For years now, shareholder concern has mounted about the potential size of executive payouts under Persimmon’s 2012 LTIP. In 2018, with the final award levels set, Persimmon resorted to emergency measures to stave off an impending shareholder revolt.

Under the 2012 LTIP, executive payouts were determined by the amount of money returned to shareholders under the company’s 2012-2022 Capital Return Plan. Billed as a long-term plan to align executive strategy with shareholder interest, questions quickly mounted: About the absence of any cap on the size of potential payouts.

About whether the targets were sufficiently stretching. About the long-term impact of directly incentivising management to return cash instead of investing it. About whether executives were being rewarded for their performance, or government policy. There were a number of questions.

The questions about the target stretch turned out to be particularly prescient. The company quickly returned £4.85 per share under the Capital Return Plan, significantly exceeding the performance hurdles of £1.70, £2.80 and £3.90. The result was a total pot of approximately £99 million due to be awarded to the three participating executives in FY2017 (subject to a holding period). This payout made CEO Jeff Fairburn one of the UK’s most highly paid executives and prompted significant public outcry and investor backlash.

While it is fair to say that shareholder concerns were clearly telegraphed in the lead up to the AGM, the extent to which the remuneration committee took heed is notable — and it appears that shareholders noticed. At the 2018 AGM, nearly a third of shares abstained from voting on the company’s remuneration report. Since abstentions are excluded, the proposal passed, receiving the support of just 36% of investors — but 51.48% of investors that cast a vote on the proposal.

The reason? Persimmon’s board was ultimately proactive in its response to shareholder dissent. On February 23, 2018, Persimmon announced a number of decisions made with the express purpose of reducing the quantum of awards; the executive directors surrendered 2.8 million shares, their salaries were frozen for 2018, and no bonus awards would be granted for FY2018. They also embarked on a wide-ranging campaign of engagement, the effectiveness of which is evident in the results of the AGM. That such a large portion of shareholders abstained is a testament to an engagement campaign that addressed several concerns that might otherwise have led to an against vote.

SAFESTORE

It’s possible that Persimmon’s board learned from Safestore’s experience last year —  the storage company had to withdraw its remuneration proposals in the lead up to its 2017 AGM due to an expected lack of support. Safestore’s new policy faced criticism, particularly in relation to a proposed grant of 2,000,000 shares to the CEO, which had a face value on grant of just over £8.5 million. The board took the time between the AGM and a follow-up EGM to gauge shareholders’ mood and make some changes to appease them — in particular, reducing the award quantum by 20%, and increasing executive shareholding guidelines. Much like at Persimmon, it was ever so barely enough: Safestore’s remuneration report received a 44.2% against vote (10% abstained) and its long-term incentive plan received a 43.9% against vote (10% abstained), but the proposals passed.

It’s not clear that Safestore’s remuneration committee is aware of quite how close they came, though. Despite the high level of shareholder discontent, the committee apparently saw itself in somewhat noble terms: “We have however remained true to our beliefs and retained the three central principles of the scheme; below market rates for base pay, payment for outstanding performance only and a five-year time horizon.” The committee pledged to “maintain engagement”, but it’s not clear what that meant in practice: the grant went ahead, and no changes were made to the remuneration structure opposed by nearly half of shareholders.

Perhaps unsurprisingly, at the 2018 AGM, Safestore’s remuneration report faced significant opposition, with 48.26% of shareholders voting against the proposal. More striking is that shareholders also targeted members of the remuneration committee, with chair Claire Balmforth receiving a mammoth 47.7% against vote.

Will the board redouble its outreach and communication while remaining true to its beliefs, or make fundamental changes to its remuneration structure? And, either way, will Claire Balmforth be there to make the pitch? We’ll have to wait and see. For now, rest assured that, in the words of board chair Alan Lewis, “[t]he Board appreciates that the remuneration policy continues to divide opinion amongst shareholders and Claire, as Remuneration Committee Chairman, and I will as a matter of priority be listening to and engaging with shareholders. I can assure shareholders that our management team will be maintaining focus on delivering market beating performance and value to all shareholders”.

Glass Lewis Perspective

Remuneration committees have a critical role in determining the remuneration of executives. Glass Lewis believes committees should regularly review a company’s remuneration policies to ensure their continued effectiveness, as well as to respond to shareholder concerns if there is a relatively low level of support for the firm’s re muneration proposals. When assessing the decisions and actions of the remuneration committee, we typically defer to the judgment of its members; however, we will recommend against the chair and/or members of the committee when the board has maintained, in our view, poor remuneration practices in successive years, or if it has failed to adequately respond to a significant number of negative votes on recent remuneration proposals.

In the case of Persimmon, we have repeatedly expressed strong concerns regarding the terms of 2012 LTIP. We recommended voting against the remuneration report, but refrained from recommending against any committee members on the basis of these concerns. This decision largely reflects the level of disclosure provided in the remuneration report, and the level of responsiveness displayed by the committee.

At Safestore, we considered a number of factors. While we acknowledge the reduction to the award’s size prior to the 2017 EGM, we were concerned that the board does not appear to have followed up on this responsiveness, despite extremely high shareholder opposition at the EGM. We found the subsequent implementation of the approved policy troubling and recommended voting against the remuneration report, and against all members of the remuneration committee.

The Bigger Picture

Abstentions at Persimmon demonstrate that investors are taking a nuanced approach, and responding to committee responsiveness. By contrast, investors at Safestore came very close to demonstrating that staying true to your beliefs is admirable, until it gets you voted out. And if you can’t be responsive to shareholder concerns without compromising those beliefs, it may be time for a bigger rethink.